Osborne's £100bn plan for UK economy

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British Chancellor of the Exchequer George Osborne details plan to help cushion Britain's banks against the spiraling eurozone debt crisis.

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George Osborne announced plans for a £100bn support programme for UK economy,

Fears turmoil in the eurozone could lead to a severe UK credit crunch and higher interest rates

George Osborne on Thursday night announced plans for a £100bn support programme for the British economy, as he battened down the hatches for a worsening "eurozone debt storm".

The chancellor told a City audience that he was working with Sir Mervyn King, the Bank of England governor, to "deploy new firepower" amid fears that turmoil in the eurozone could lead to a severe credit crunch and higher interest rates in Britain.

Mr Osborne's aides spoke of a "maxing out of Plan A" -- taking advantage of the country's record of fiscal discipline and credibility with the markets to unleash an aggressive monetary policy offering cheaper loans to businesses and households.

Sir Mervyn also raised the prospect of a new round of quantitative easing, saying that "the case for a further monetary easing is growing".

At the heart of the package is a BoE "funding for lending" scheme to cut bank funding costs in exchange for lending commitments. The Treasury claims the programme, designed to address the rising costs of loans and mortgages, could support an estimated £80bn in new loans.

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In a further effort to counter worsening market conditions, the BoE will also on Friday activate an emergency scheme that offers six-month liquidity to banks in tranches of no less than £5bn a month.

The initiatives are part of what Sir Mervyn called "a textbook response" to Britain's economic woes, combining tight fiscal policy and active monetary policy.

The governor had previously insisted that BoE liquidity and funding operations could only be done at penalty rates, but has relented due to what he called an "ugly" economic outlook.

Mr Osborne said he had worked "closely" with the governor on the plan, although some -- including deputy Bank of England governor Paul Tucker -- have questioned whether Sir Mervyn has been imaginative enough in seeking ways to boost growth.

"It is very hard to argue that monetary policy -- in all its forms -- has run out of road," Mr Osborne told his Mansion House audience. "The government -- with the help of the Bank of England -- will not stand on the sidelines and do nothing as the storm gathers."

He added that "things could get worse before they get better" in the eurozone, repeating his claim that it "may take [a] Greek exit" to spur other single currency members to take the action needed to ensure the euro's survival.

Labour has for months been urging Mr Osborne to adopt a "Plan B" to stimulate the UK economy, but the chancellor insisted there were "real and significant" risks in abandoning his fiscal plan: "Credibility is hard-won and easily lost and losing it is extremely costly."

Mr Osborne's adherence to his Plan A fiscal policy is now being accompanied by a much more aggressive approach towards monetary policy, which was endorsed by senior cabinet ministers in early May.

As well as the BofE schemes announced on Thursday, the Treasury is looking to use its balance sheet to underwrite some of the risk of new housebuilding and infrastructure investment in the coming weeks.

The "funding for lending" scheme is to become operational "within a few weeks" and will provide long-term funding for banks at below-market rates. The support will be conditional upon "the peformance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty".

The BoE will receive a government indemnity to undertake the scheme and lend to banks against collateral.